Weekly Market Review - Insights | Affin Hwang Asset Management

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A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 7 june - 11 June 2021

Global Markets Up Shrugging Off Inflation Fears

Global equity gauges climbed higher last week as investors appear to be shrugging off inflationary concerns. The S&P 500 was up 0.4% as global investors warm up to the Fed’s view that the rise in inflation is transitory as supply chain bottlenecks are resolved. The technology-heavy Nasdaq index chalked up gains of 1.9%. In Asia, the broader MSCI Asia ex-Japan index climbed a meagre 0.1%, whilst the Hang Seng index closed 0.3% lower.

Last week, US lawmakers in the House of Representatives proposed a set of antitrust bills to rein in the power of big tech companies. The definitions of big tech companies targeted by the bills state that it must have a market capitalisation of at least US$600 billion, more than 50 million active monthly users or 100,000 monthly active business users. Whilst the bill did not name any specific company, only 4 tech giants including Facebook, Amazon, Apple, and Google currently meet these criteria.

Under the proposed bill, it would bar big tech companies from self-preferencing, i.e. promoting their own products in their respective platforms and side-line competitors. For example, Amazon which also competes with other third-party sellers in its platform by selling similar products under its own in-house brand may no longer be allowed to do so under the new bill. The bill might also make it harder for big tech companies to acquire smaller competitors.

However, the bill is still at the preliminary stage. It would still need to go through several readings at the House of Representatives before being approved by the Republican-controlled Senate. Our portfolio exposure to these 4 companies ranges between 2.0-8.0%.

On COVID-19 developments, we are seeing positive trends with regards to mortality and infection rates as vaccinations are ramped-up. In the US, the 7-day average fatality rate has dropped from its chilling peak of 3,300 deaths per day back in January 2021 to 330 deaths per day currently.

In Asia, Singapore has also started to ease some of its movement restrictions by allowing larger social gatherings as well as allowing gym and F&B operators to reopen their premises. Thailand is also ramping up its nationwide vaccination rollout as supply shortages are resolved.

On portfolio positioning, we initiated exposure in Danone, a global food manufacturer with a diverse product range including dairy and bottled water brands like Evian. With a new CEO on-board with ample experience in restructuring, Danone is poised for a turnaround after a string of setbacks. Cash level ranges between 3.0-5.0% for our regional portfolios.

Other Macroeconomic Updates

The ECB held their June meeting last week and in line with market expectations, they kept key rates on hold. On their quantitative purchases, the central bank has decided to maintain their current pace of purchases and the Pandemic Emergency Purchase Programme (“PEPP”) will continue up till at least March 2022. The forecast for growth and inflation were also revised higher during the meeting, and is now expected to reach 1.9% and normalising to 1.5% in 2021 and 2022 respectively. This is still well below their target forecast of 2.0%. Overall, the ECB appeared dovish and taper talks were not discussed. Following the meeting, we saw traders trimming Euro Long Duration while the DXY strengthened by 0.5%.

Another key data last week was US inflation in which we saw US’ May CPI rise 5.0% YoY, beating market consensus of 4.7%. On a core inflation basis, we saw numbers rise by 3.8% against consensus of 3.5% in the same period. This suggests that there still exist inflationary pressures. Diving into the specifics, we see most areas (used cars & trucks, rentals, etc.) where the jump in prices is transitory supporting our view on transitory inflation.

Following the announcement, we saw US treasuries rally on a WoW basis with yields breaking the lower end forecast range from 1.50% to close at 1.45%. This was despite the recent US jobless claim numbers and stronger inflation numbers. We attribute three key factors to the rally in treasuries. One, we think that inflation expectations are declining. Secondly, we think that the market is more willing to accept the Fed’s stance on transitory inflation as higher inflation dampens consumption and investment which leads to lower growth. Thirdly, real monies have been short on bond duration and the resulting short-cover drove the rally in treasuries.

We will be watching out for the upcoming FOMC meeting, to see if there are any hints of tapering, which we do not expect to happen at this juncture following weak labour data in April and May 2021.

The 47th G7 summit was also held last week in the UK, in which we saw further endorsement of a global minimum tax and climate control, both of which analysts are still questioning on its real-world application. The key highlight from the meeting is an ensuing proposal, led by Biden, to finance infrastructure projects to counter the growing influence of China. We do not see any immediate impact from this narrative towards our portfolio until we there is a concrete plan in motion.

Updates on Malaysia

On the domestic front, the local market traded cautiously with the benchmark KLCI flat WoW. Markets are paying close attention to the vaccination pace in the country that would put the local bourse on the path to recovery. Since 8 June 2021, vaccination rates have accelerated from just 60,000-80,000 per day to 120,000-150,000 per day now. The government is targeting to reach 200,000 per day in July and 300,000 per day in August 2021.

Assuming these targets can be achieved, 80.0% of the population could be vaccinated by October and herd immunity can be reached. The government is also currently working towards approving vaccination for young adults aged between 12 to 17 to reach the targeted percentage.

Last week saw some political developments, with a slew of meetings held between the Yang di-Pertuan Agong and several party leaders in the country. A special Meeting of Rulers will also be held this Wednesday. This comes on the back of growing calls to end the state of emergency which is slated to end on 31 August 2021.

On corporate news, KLK Berhad submitted a proposal to acquire a 56% stake IJM Plantation Berhad for RM3.10 per share. This is a 26.0% premium to IJM Plantation Berhad’s last closing price prior to the announcement. We see this as a win-win scenario for both parties with the acquisition viewed as earnings accretive to KLK Berhad over the long-term. At the same time, IJM Corp will be able to monetise this investment and redeploy the proceeds into its core operations (infrastructure) and possibly pay-out some as dividends.

Post-announcement, we have been trimming our exposure in IJM Corp, while we maintained our position in KLK. Compared to its other large cap plantation peers, KLK is trading at a more attractive valuation with earnings growth potential.

Fixed Income Updates & Positioning

Asian credits – especially IG names – traded firmer in the week as treasury yields trended lower; which saw IG spreads tightened by some 2 bps. On the flipside, the HY segment was much weaker with spreads widening by about 35 bps. The softness within the HY space is likely due to the financial health and volatility that is tied to China Evergrande Group, which in turn adversely affected the whole Chinese HY property market. China Evergrande has a US$1.4 billion bond due at the end of June 2021, and with a reported US$24 billion cash reserve on hand, no defaults should be expected from the Group at this juncture.

On portfolio action, nothing much was changed. Portfolio duration was trimmed across our fixed income portfolios ahead of CPI numbers. Going forward, the strategy is to keep duration at short end level.

Back home, markets are still patiently waiting for guidance on fiscal deficit and GDP growth from the Ministry of Finance as well as Bank Negara Malaysia. There was a RM5.0 billion 10-Year MGS auction which caused weak sentiment for markets last week. On week-on-week basis, market movement was flat to around -7 points. Being influenced by lower US treasury yields, the 10-Year MGS was down 10 bps to 3.22% whereas the auction level was at 3.31% on average.

We continue to observe foreign inflows into the Ringgit bond market; however, these inflows have been slower as compared to previous months. In May, inflows stood at RM1.9 billion and year-to-date cumulative inflows stand at RM25.0 billion, whereas foreign holdings of MGS stood at 41.1%.

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